LAST UPDATED: 08 January 2006
WELCOME
This is the first edition of the
ETF Newsletter by theStockGroup.com. The primary manager of theCore
Portfolio is
Jason Geach
and the primary manager of theAlpha Portfolio is
Kelon
Morley. Together we collaborate to maintain a consistent vision
and direction for both portfolios. Please contact either of us if you
have any questions.
Quick Links: theAlpha Portfolio - theCore Portfolio
theALPHA PORTFOLIO
The New Year ushered in new highs on above
average volume for the major indices. The January effect more than made up
for the missing Santa Claus rally. Or was it simply jubilation in response
to Dick Clark’s return to Time Square for New Year’s Eve?
According to the January Barometer theory, January monthly performance sets the direction for the year. Some have taken this a step further by suggesting that the first trading week of the year predicts the year’s performance, particularly for rising markets. Before accepting this premise on the heels of a good showing during the first week, let’s consider the current market conditions.
On the positive side, breadth improved this past week lending more credibility to the rally that began late October ’05. As illustrated in the chart below, the NYSE A/D line had not confirmed the advance to new highs made by the SPX in November and December. However, strong action during the past week generated new highs for the SPX as well as the NYSE A/D line.
Equally encouraging has been the resumption of technology leadership, particularly by semiconductors. The semis relative strength break above the early December high suggests they should continue to lead the market up and extend the current rally.
And finally, after consolidating at recent highs and holding support while working off overbought conditions, the market has broke out of the recent trading range with a move higher.
Unfortunately, several areas of concern remain that suggest the current rally may fail. First, momentum indicators have shown negative divergences for some time. While prices have continued to climb, this condition will not persist indefinitely. Also note that the SPX is now at upper channel resistance.
While the NYSE A/D line has improved with the most recent rally, the number of new highs has continued to contract, suggesting less internal strength than normally accompanies a sustainable bull rally.
Potential long term resistance exists at the 61.8% retracement of the 2000-2002 decline. Despite mid-month attempts to break through, neither November nor December closing prices were able to do so. These failed attempts may have been simply due to light holiday trading. Nonetheless, until the market makes a monthly close above this resistance zone, a sustainable rally remains in doubt. January is off to an impressive start, but a strong close at the end of the month will need to occur to signal more upside is in the cards. For this reason, the January monthly barometer appears to be more likely an indicator for the year than the first week’s performance.
Finally, closer inspection of the recent rally reveals negative momentum divergences with an expanding triangle pattern that may represent a broadening top reversal. Should such a reversal occur, then a trip down to the 1210-1220 zone would be a high probability. While this wouldn’t necessarily signal the end of the current bull cycle, in combination with longer term negative divergences at potential resistance at this late stage, it would certainly raise the likelihood.
Given our concerns about the US equity market, a portion of the Alpha portfolio is held in cash with the intent of establishing short positions upon a reversal and trade through. These positions will initially be taken with at the money SPX puts with near month expiration. Should our proprietary long/short model trigger a subsequent intermediate term short position, then additional short positions will be established with 2-3 month out puts and/or short ETFs (e.g. QQQQ, SMH, or SPY).
The balance of the Alpha portfolio will be established with long foreign ETFs (EWJ, EWC, EFA, and/or EEM) on the next pullback to support, while a short position on TLT (20 yr US bonds) will be taken at the open Monday, Jan 9th.
Alpha Portfolio for the
week beginning Jan-09-2006:
TLT - short - opening Jan-09 - 20% = $10K
Cash - 80% = $40K
Anticipated positions (an email notification will be sent to notify subscribers when a trade should be completed):
SPY - short -
expected week of Jan-09 - 20% = $10K via long, at-the-money puts with near
month expiration
NOTE: Bought 100 contracts of SPYMY puts on 1/10/06 at 11:34 AM CST for
$0.95 ($9,500).
EWJ - long - next pullback to support - 15% = $7.5K
EWC - long - next pullback to support - 15% = $7.5K
EFA - long - next pullback to support - 15% = $7.5K
EEM - long - next pullback to support - 15% = $7.5K
theCORE PORTFOLIO
theCore Portfolio
as it's more aggressive counterpart is starting with a base portfolio of
$50,000. With the significant run-up in stock prices during the first
week of January, we are taking a more subdued initial investment until the
next pull back occurs resulting in a 80% cash position. The remaining
20% will be placed in inflation protected bonds (Treasury Inflation Bonds -
TIPs) and Natural Resources.
Monday, January
9, 2006 Morning Purchases
1. TIP (iShares TIPs) - $5,000 (10%)
2. IGE (iShares Natural Resources) - $5,000 (10%)
3. Cash (Brokerage Money Market) - $40,000 (80%)
Anticipated future positions include ILF ($10,000 - 20%), EEM ($5,000 - 10%), JKH ($10,000 - 20%), NYC ($5,000 - 10%), and VBK ($10,000 - 20%). These positions will be opened on the next market pull back with notification sent via email to our paying subscribers.
TRADES - WEEKLY REPORTS & EMAIL NOTIFICATION
We make
an effort to open and close positions on Monday mornings, but the market is
not always forgiving. Some cases require trades to be completed during
the week and/or during the trading day as market volatility necessitates.
In these situations, the weekly newsletter will predefine opportunities that
we have identified and an email notification will be sent to notify
subscribers when a trade should be completed.
Contact us today if you have any questions regarding our offerings or our service.
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